Wednesday, December 30, 2015

China’s Stock Market Still a Draw After Tumultuous Year
Investors are still buying stocks and the Shanghai Composite Index is up almost 10%, despite the summer’s crash

Wall Street Journal
Dec. 28, 2015 6:46 a.m. ET

Even if Chinese investors got burned in the selloff this year, the stock market, for many, still hasn’t lost its appeal.

The Shanghai Composite Index is on track to end the year as one of Asia’s best-performing major benchmarks, up 9.3% as of Monday’s close, despite losing as much as 43% of its value over the summer. That outpaces many other major global benchmarks, including a year-to-date gain of 0.1% in the S&P 500 and a 4.7% decline in London’s FTSE 100.

The Shanghai benchmark’s smaller counterpart has recorded even more spectacular gains. The Shenzhen Composite Index has risen 63% this year while the ChiNext, composed of growth stocks and sometimes referred to as “China’s Nasdaq,” is up 86%.

By a number of metrics—including trading volume, account openings and the amount of borrowed money used to invest—Chinese investors remain committed to buying stocks, a turnaround from past crashes that sent investors fleeing and left the market languishing, at times for years.

This time, Beijing’s barrage of measures to rescue its cratering markets seemed to convince China’s domestic investors that government support would continue, analysts say.

“When we asked people would they invest in stocks, the answer was yes, because the government is supporting the market,” said Francis Cheung, head of China-Hong Kong strategy at CLSA Ltd.

Beijing’s role in China’s stock performance even preceded its massive rescue, which some analysts estimate cost hundreds of billions of dollars. The government drummed up support for stocks leading up to the market peak, which helped lift Shanghai 151% in the 12 months through June.

When prices started sliding over the summer, Chinese authorities told government investors—the so-called “national team”—to buy. Hundreds of companies even voluntarily suspended trading of their shares rather than let them fall.

To be sure, many of Beijing’s measures to stop the selling also rattled investors, including steps to crimp any trading practices deemed overly risky, such as gray-market financing and short selling, the practice of using borrowed shares to bet that prices will fall. Authorities have arrested high-profile investors and brokerage heads to probe causes of the summer’s stock crash.

But for retail investors, who account for 85% of Chinese stock-market trading volume, confidence that government buying would continue convinced them to come back to the market and helped accelerate Shanghai’s recovery. Mainland shares re-entered a bull market, defined as a rise of 20% from a recent low, in November.

The recovery marks a contrast from the crash of October 2007, when the Shanghai Composite lost as much as 71% from peak to trough over the course of a year. That recovery took longer, too, with the benchmark rising as much as 96% by August 2009, and didn’t recover previous highs.

After the 2007 crash, market volumes fell by more than a third in the following six months and took two years to reach the same level of trading activity. Thereafter, trading volumes remained thin.

In the six months from July to December this year, however, daily trading volumes fell on average by 11% compared with the prior six-month period, according to data from Thomson Reuters.

The number of new trading accounts has also started to recover more quickly this year compared with the months after the 2007 crash.

Investors opened about one 10th the number of new accounts in February 2008 as they did in October 2007, when the selloff started. While new account openings in Shanghai have fallen to 3.18 million in November from 8.78 million in June, the levels since the selloff still outstrip almost every month since the start of 2008.

A practice unique to the latest rally was margin trading, the use of borrowed money to fuel stock purchases. Peaking at 2.2 trillion yuan ($339.5 billion) in June, margin lending amplified gains on the way up, but also accelerated losses as investors rushed to sell positions to repay their brokers.

Authorities reined in brokers’ lending during the summer, but since then, such borrowing has started to tick up again as investor confidence recovers.

Retail investors’ clutch over the market—which has hovered around current levels since 2007—can spark wild swings in trading. That is one reason why China’s government has sought to lure more foreign institutional investors into its domestic equity markets over the past decade.

Yet appetite for Chinese stocks has dwindled among global investors, who were given broader access than ever before through a much-hyped trading link launched in November 2014 to connect the Shanghai and Hong Kong stock exchanges. A planned extension of the program to the Shenzhen stock exchange is expected in 2016.

After a promising start, investors pulled money from Chinese stocks during three months out of the five months since July, and are on track to record a fourth month of outflows during December.

Write to Gregor Stuart Hunter at

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